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‡ US subprime crisis

‡ Stability of banking system rudely shaken

‡ Lemon Brothers- Tier I 11%

‡ G-20 summit- Seoul

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‡ Excessive Leverage
‡ Excessive credit growth
‡ Insufficient liquidity
‡ Inadequate risk governance
‡ Financial market
‡ Systematic risk and interconnected financial
players
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Úedefining both the quantity

and quality of capital

Introduction of capital
conservation buffer

Introduction of counter-cyclical
capital buffer

Introduction of leverage ratio

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ºTotal requirement - 8%
to 6% from 4%

ºCommon equity and retained earnings (instead of

perpetual debt) more than 50% - current 50%

ºÚest met by Tier II

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Ñ inimum capital of common equity ± 2% to 4.5%

Ñ After deducting perpetual debt

Ñ Phased into apply from ± Jan 2016

Ñ Come into full effect from - Jan 2019

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- 2.5% capital conservation buffer

- et by common equity
- This will take the minimum core equity ±
4.5%+2.5%
- Purpose ± severe stressed financial and
economic environment
- Phased into apply from ± Jan 2016
- Come into full effect from - Jan 2019
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£ 6ational regulators ± up to 2.5% (0 -2.5)

£ According to individual national circumstances
£ To achieve broader prudential aim
£ Excess credit growth in excess of GDP
£ Ex: 2008 global meltdown

Both can be utilized to absorb losses during

stress
Less capital than the requirements ± restriction in
payment of dividend, bonuses and share buyback
  
   
 


ºåToo big to Fail´

ºCapital beyond standards

ºThis probably would include capital surcharge and

contingent capital

   

‡ Disqualified ± investment in financial subsidiaries

and associates, goodwill, other intangibles,
deferred tax assets etc
‡ As per existing 50 from tier I 50 from tier II
‡ 6ew regime all deduction from core capital
  

‡ Banking business is highly leveraged

‡ Assets are funded by borrowed funds- deposit
from public
‡ 6ew norms seek to reduce the build up of excess
leverage
‡ Úatio of Tier I capital : Total assets
‡ During crisis in US 1:50
‡ Basel III sets 1:33
‡ Effective from 2018.
     
   
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‡ To maintain high quality assets to meet liquidity ±

30 days(no mismatch)
‡ AL guidelines of ÚBI- 28 days(mismatch)
‡ Liquidity based weightage for assets
100%- Cash and Govt. Bonds
0 to 50%-Corporate Bonds

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‡ Use more stable sources to fund operations

‡ Long term loans from short term sources- Asset
liability mismatch
‡ 6SFÚ compares funding sources and
requirement- balance sheet of banks
‡ B.S given weightage, liability side ± stability
asset side ± duration of assets
‡ 6ew norms- available stable funding > required
stable funding

  

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1. Tier I capital 4% 6%
Core tier I capital 2% 4.5%

2.Capital Conservation nil 2.5%

Buffer

3.Systematically - Beyond the standards

Important Bank
 

 
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‡ Well capitalized and anaged
‡ Indian Úegulatory System
‡ 6o significant impact by proposed capital rules
‡ Comfortable Tier I capital
‡ State run banks -70%
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